The Canadian economy is expected to ring in another tepid year of growth in 2013, not enough to whittle away at the country’s jobless rate.

Several economists have shaved their forecasts for growth next year, and most don’t see the unemployment rate budging much from current levels – pegged at about 7.3 per cent this year. On Thursday, the International Monetary Fund cut its GDP forecast for Canada for next year to 1.8 per cent, while CIBC trimmed its estimate to 1.7 per cent. Both had previous forecasts of 2 per cent.

Shares of Wal-Mart Stores Inc. were down because investors see those stocks as proxies for the overall economy.
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Union members and supporters march to the Michigan State Capitol building to protest against right-to-work legislation in Lansing, Michigan December 11, 2012. The Republican-majority Michigan legislature on Tuesday approved laws that ban mandatory membership in public-and-private sector unions, dealing a stunning blow to organized labor.
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The shift – driven by concerns about the U.S. “fiscal cliff,” a recession in Europe on top of a weakening housing market in Canada and high household-debt loads – means growth in 2013 could be the slowest since the recession.

“Downside risks from external headwinds continue to loom large,” the IMF said in its latest assessment of the economy, adding that it expects the jobless rate to rise a notch next year before improving after that.

Given that Canada has already tapped fiscal stimulus and a housing boom to shelter the economy from sluggishness abroad, “the country’s ability to set its own course is now much more limited,” said Avery Shenfeld, chief economist at CIBC World Markets in his outlook.

“Escaping economic mediocrity will depend on the kindness of strangers, with exports and related capital spending critical to Canada’s fate in 2013-14.”

Activity is expected to rev up by the middle of next year and into 2014, when the IMF sees growth accelerating to 2.25 per cent. That still-soft performance means interest rates shouldn’t rise until late next year, and then only gradually as activity revs up.

Household debt-to-income ratios remain high in relation to assets. At the same time, the IMF’s analysis shows real house prices and residential investment remain “above levels consistent with economic fundamentals.”

While Canada is unlikely to suffer from “a house boom-and-bust episode” similar to that of the United States, the unwinding of household financial imbalances could prove “disruptive,” especially if household debt keeps rising. It cautions that any unexpected shocks on the Canadian economy “would be exacerbated by the elevated level of household debt.”

The federal government has already tightened mortgage lending standards, a move that was “appropriate,” said Roberto Cardarelli, IMF mission chief to Canada, at a press conference.

But should household debt levels continue to rise – and many economists believe they will, albeit at a slower pace – “additional measures may be needed,” the IMF said. Some options include requiring higher down payments for first-time home buyers and lowering caps on debt-service-to-income ratios.

House prices are currently about 10 per cent overvalued, said Mr. Cardarelli. He sees a cooling in the housing market, with residential investment and house prices expected to fall “gradually to more sustainable levels.”

As for external risks, sharp fiscal consolidation in the U.S. would heighten challenges for the Canadian economy. IMF analysts figure the impact on Canada from the “fiscal cliff” would be about three-quarters of the effect on the U.S. economy. A worsening euro-area crisis could hit Canada through tighter financial conditions and waning confidence. And weaker global demand would slam Canadian exports and dent commodity prices.

Balancing the federal budget by 2015 is “within reach,” however some provinces may need to step up efforts if they are to balance their books.

In the event of a big shock to the economy, the federal government should consider new temporary fiscal stimulus measures, the fund said. And the Bank of Canada would have room to cut interest rates if necessary.

The Canadian currency is between 5 per cent and 15 per cent overvalued, meaning it is trading higher than what economic fundamentals would suggest relative to other currencies.

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